Pakistan achieved two landmarks during last
financial years. One of these was that the country's exports exceeded
US$ 12 billion in a year for the fist time in its more than five
decades long history. A lot has been written and said about this
achievement. However, many critics say that maintaining the growth
momentum will be difficult. As against this others say Pakistan has
the potential to double its exports in next five years. They also say
that it is not wishful thinking if all the stakeholders are willing
and prove this by their acts.

To double the exports Pakistan has to achieve
around 15% growth in exports annually over the next five years.
Historically and despite all odds the country has been able to achieve
nearly 10% annual growth rate. All those skeptical about achieving the
target need to count country's strengths rather than looking at the
threats only. It is good to be fully aware of threats but ignoring the
strengths diminishes the strength to face the challenge courageously.

THE MACRO PERSPECTIVE

Both agriculture and industry have performed better
than anticipated during the initial months of current financial year,
laying a strong foundation for the economy to exceed the 6.6 percent
real GDP growth target for the year. Provisional estimates place
value-addition by Kharif crops slightly above target following a
robust cotton production. The growth of approximately 14 percent
recorded by large scale manufacturing during Q1-FY05 is also well
above the 12.0 percent annual target.

However, while leading indicators suggest that the
services sector will turn in a strong full-year performance, the
outlook for agriculture and industry during H2-FY05 still remains
uncertain. Specifically, hopes of achieving the full-year agri-growth
target rest crucially on the wheat harvest, which may be substantially
below target due to a worsening water supply. Similarly, the prospects
for industry are clouded by concerns over the impact of the increased
competition in global textile markets post-December 2004 on Pakistan's
exports.

The outlook for agriculture and industry during
H2-FY05 still remains uncertain. Specifically, hopes of achieving the
full-year agri-growth target rest crucially on the wheat harvest,
which may be substantially below target due to a worsening water
supply. Similarly, the prospects for industry are clouded by concerns
over the impact of the increased competition in global textile markets
post-December 2004 on Pakistan's exports.

The latter concern has been boosted particularly by
the apparent fall in exports in key textile categories in months
leading to December 2004. However, a closer look at leading indicators
does not suggest grounds for excessive pessimism on export prospects.
The industry has invested heavily in BMR and capacity enhancements,
imports of raw material has remained strong, and net credit growth
(particularly for working capital) has risen sharply even as the price
of a key input — cotton — has dropped because of a bumper cotton
crop.

EXCHANGE PARITY

The support for the Rupee by the State Bank of
Pakistan (SBP) is simply a continuation of the policy seen during
preceding years of providing a degree of stability to the economy. The
SBP had earlier purchased forex in the inter-bank market to prevent an
abrupt depreciation of the Rupee during FY03 and part of FY04, and
similarly, it has sought to prevent a sharp depreciation in the latter
half of FY04 and the beginning of FY05. However, this does not mean
that the parity will remain unchanged — only that any change would
be gradual, and stability in the market will be maintained

It is in this perspective that the SBP had
initially allowed the Rupee to weaken in the inter-bank market, until
it became clear that decline of the Rupee was increasingly driven by
excessive speculation, forcing a self-fulfilling decline of the
domestic currency. It is only in this context that a drain on forex
reserves is justified, and a central bank has to therefore strike a
balance between allowing the local currency to find its footing in the
market, and preventing instability. It should be kept in mind that the
SBP's ability to intervene heavily in the inter-bank market stemmed
directly from the much-criticized large reserve holdings, and it shows
that the presence of substantial central bank reserves play an
important role in enhancing confidence on the stability of the
domestic currency and thus preventing 'runs' on.

However, the sustainability of higher growth path
warrants that Pakistan has to take advantage of the opportunities
offered by the end of the Agreement on Textiles and Clothing (ATC)
regime in January 2005. The domestic industry has certainly invested
heavily to this end, but this needs to continue. Moreover, the
government is supporting this endeavor by providing a conducive legal
and regulatory environment (particularly social and environmental
compliance), supportive infrastructure and logistic management, as
well as through heavy investments in training and skill up-gradation
of the labor force. It has become crucial to enable the substantial
productivity increases needed to keep Pakistan's economy competitive
and attract the necessary FDI.

The strategic location of Pakistan as the least
cost mover, supplier and buyer of internationally traded goods, energy
supplies, and IT & financial services, to Central Asia, Western
China, the Middle East and South Asia, can be exploited on the back of
Gwadar Port and the highway network, oil and gas pipelines, hydel
electricity imports and export, SAFTA, transit trade arrangements and
liberalization of services trade.

In the shorter-term, there is also an opportunity
for Pakistan to reduce the costs of business by reducing red-tape,
improving governance, and ensuring policy continuity. One major
opportunity lies with the reforms to WAPDA and KESC — studies show
that the high cost and low reliability of energy supply is one of
Pakistan's key competitive disadvantages. Another important bottleneck
is the Karachi port; a substantial improvement in throughput (and
attendant cost reductions) could make a crucial difference to the
country's competitive standing.

FOREIGN TRADE

The trade deficit for July-November FY05 rose to
US$ 2.5 billion as compared to a mere US$ 0.4 billion during the
corresponding period last year. This rise was caused by a steep growth
of 49.3 percent in imports, which outstripped the 11.1 percent export
growth during this period. In fact, the trade deficit had begun to
widen significantly during the latter half of FY04, amidst a general
rise in imports as economic activities accelerated, and international
oil prices rose; approximately two thirds of the total FY04 imports
were recorded in the last four months of the year. This trend appears
to be continuing into FY05, with the Jul-Nov imports at 47.2 percent
of the US$ 16.7 billion annual import target.

Export performance, on the other hand, also raised
a few concerns during this period. Country' textile sector recorded
2.4 percent rise during Jul-Nov FY05 as compared to the 11.8 percent
growth during the same period lat year. This deceleration in this
sector was caused by a sharp fall in two major categories namely: bed
wear and synthetic textiles. This weakness in the performance of bed
wear exports might be attributable to the imposition of antidumping
duty on this category by the EU and the embargo imposed by the US on
bed wear exports in mid-November 2004 to check over-shipments in this
category. On the other hand, synthetic textile exports were affected
by a significant rise in the price of polyester staple fiber due to
rising international oil prices since April 2003.

THE CONCERN

Of greater immediate concern is the export
performance, as the aggregate July-November exports are marginally
lower than the target set for this period. A closer look at the
provisional trade data reveals an apparent deceleration in textile
exports. Also, with effect from January 1, 2005, Pakistan's textile
exports will face a more competitive trading environment, as the end
of the ATC removes access restrictions (quotas) to key Western
markets.

Exports reached US$ 5.4 billion during
July-November, recording 11.1 percent rise over the same period last
year, which is 0.9 percent lower than the export target set for the
period. The analysis of monthly export performance reveals that the
sharp fall in the exports of October & November is largely
responsible for the shortfall in exports against the target for the
period.

This below-target aggregate export performance is
attributable to the deceleration in the textile export growth during
this period. It is worth noting, however, that since the data set used
in the analysis contains final numbers only for the months of July and
August, there is a possibility of an upward revision of export values
once the final data for the remaining months is available.

One bright spot in the export performance is the
rising exports of some developmental export categories especially
chemicals & pharmaceuticals and engineering goods as well as other
manufactures namely molasses and articles of plastic. The rise in
these exports in particular, probably reflects the supportive measures
by the government in recent years aimed at providing better incentives
to exporters of non-traditional items.

TEXTILE EXPORTS

Textile export growth slowed down mainly due to a
steep fall in the bed wear and synthetic textile exports. Also the
share of textiles in total export earnings fell to 59.9 percent during
this period as compared to 65 percent in the comparable period of the
last year. The weakness in the performance of bed wear exports might
be attributable to two reasons: (1)
Imposition of antidumping duty on this category by the EU; and (2)
the Embargo imposed by the US on bed wear exports in mid November 2004
due to over-shipments in this category. On the other hand, synthetic
textile exports are affected by a steep rise in the price of polyester
staple fiber due to rising international oil prices since April 2003.
In this connection, the downward revision of duty drawback by CBR on
polyester staple fiber has added to the concerns of the textile
industry. On the positive side, however, knitwear exports reached
record high level of US$ 888.8 million, followed by cotton fabrics
exports, which recorded 10.3 percent growth reaching U$ 673.1 million.
The improvement in these categories came both from rising prices and
quantum. In this connection, the increase in unit prices of these
categories despite a steep fall in the international cotton prices
hints at higher value addition.

QUOTA EXPORTS

The share of quota exports in total rose from 39.2
percent in Q1 FY04 to 44 percent in Q1-FY05. This rise came from
higher growth in quota exports to the US and the EU, with the latter
having larger share on account of increased exports of cotton fabric
to this region. However, the real test for country's textile exports
would come after the implementation of the last phase of the Agreement
on Textile and Clothing. The impact of liberalization of textile trade
so far is not very significant for Pakistan as the integrated
categories account for only a small share in country's total textile
exports. This poses a difficult challenge for the textile sector as
almost entire phasing out of the remaining quota restriction affecting
Pakistan would take place in the final year leaving less time for
Pakistan's textile sector to adjust to the new environment. Saying
this, Pakistan already enjoys a strong position in bed wear and cotton
fabric exports to USA, whereas its share in knitwear exports is
gradually improving. In the EU market, knitwear, cotton fabric and bed
wear are important export categories. Keeping in view country's
current encouraging performance in the major markets of EU and the US,
Pakistan is expected to maintain its present status of a large textile
and clothing supplier in the international market despite facing tough
competition from China and India.

A second opportunity available to Pakistan lies in
the relocation of textile manufacturing units from industrial to
developing countries in order to take advantage of lower production
cost. Since Pakistan is world's fourth largest cotton producer after
China, the US and India, it can be considered as a country of choice
by some of the big foreign textile producers. Realizing this
opportunity, government has already announced certain incentives in
the trade policy for FY04. Despite these strengths, country's textile
sector is also faced with certain issues in the post liberalization
era.

PREFERENTIAL ACCESS

In the absence of quota restrictions, countries
having preferential access to the big markets seem likely to be the
largest gainers. It may be pointed out here that most of the
developing countries enjoy such preferences either under GSP (from EU)
or in the context of free trade agreements (FTA). For example, in case
of the US market, African and the Caribbean counties have zero duty
access under the Trade Partnership Act. Pakistan also enjoyed zero
duty access to the EU market (from 2002) under the GSP scheme, which
helped a long way in enhancing exports to this country. However, from
January 1, 2005 this concession would be withdrawn and an average
tariff rate of 12.5 percent would be imposed on the textile and
clothing imports from Pakistan. But in October 2004, the European
Commission proposed a simpler method of trade preferences for the
period 2006-08 under which the current five GSP arrangements would be
reduced to three:

1)
A general arrangement (reduction of 3.5% over the normal customs duty
for sensitive products, reduction of duties to zero for non-sensitive
products). 2)
Every thing but arms", giving duty-free and quota free access for
all products for the world's 50 poorest countries. 3)
A new "GSPplus" giving tariffs preferences to vulnerable
countries that meet the new objective criteria for sustainable
development and good governance (this arrangement offers zero duty for
a total of 7200 products). Pakistan can be a beneficiary from GSPplus
scheme, subject to the fulfillment of the condition that the
beneficiary country have less than 1 percent share in EU imports under
GSP.

ANTI-DUMPING DUTIES

Another issue is the increasing trend in the
developed countries (such as Australia, Canada, the EU and the US) to
impose anti-dumping duties so that they could not only restrict their
import levels but also provide implicit protection to their domestic
industries. As a matter of fact, under WTO an importing country can
impose an anti-dumping duty if there is a proof that dumping is
occurring and it is causing injury to the local firms. Since the use
of this measure is not always fair, there is a need to make this
procedure more transparent. Currently Pakistan is facing anti-dumping
duty on one of its major textile export category i.e. bed wear, that
has resulted in a steep fall in country's bed wear exports during
Q1-FY05.

OUTSTANDING EXPORT BILLS

During Q1-FY05 the stock of Outstanding Export
Bills (OEBs) held by the commercial banks and exporters increased by
US$ 57 million. The increase in the OEBs appears simply to reflect the
rise in exports. Interestingly, the share of overdue export bills in
total OEBs (exporters) has increased during Q1-FY05. This could
potentially reflect the significant Rupee depreciation during the
period under review, which created an incentive to defer repatriation
of revenues.

QUOTA FREE REGIME

Historically, the textile and apparel sector is an
important contributor to economic growth in Pakistan. It accounts for
a significant portion of traded goods, contributing 65.0 percent of
the total value of exports in FY04. The dismantling of the quota
regime therefore represents both an opportunity as well as a threat.
An opportunity because markets will no longer be restricted; a threat
because markets will no longer be guaranteed by quotas, and even the
domestic market will be open to competition. Several studies have
attempted to estimate the likely impact of the post-quota scenario on
Pakistan's textile industry.

In a recent report prepared by Will Martin (World
Bank) on the "Implications for Pakistan of Abolishing Textile and
Clothing Export Quotas" which was released on April 30, 2004 by
the World Bank, the author used general equilibrium analysis to
examine the consequences for Pakistan of abolishing the system of
quotas installed under the Multi-Fibre Arrangement (MFA) that are
being dismantled under the ATC. The aim was to capture vertical
product linkages and the rent transfers associated with quota
abolition. The main findings of the report are as under:

1- Whether
Pakistan will be better or worse off depends, inter alia, on the
extent to which exports from Pakistan are restricted relative to
exports from other suppliers; the strength of the competitive
relationship between suppliers; and the extent of complementarities
associated with global production sharing — particularly the
benefits from increased demand for textiles and clothing as inputs.

2- The
abolition of quotas in January 2005 will eliminate some, but not all,
of the distortions affecting global trade in textiles and clothing.
While the quotas will be abolished, tariffs on textiles and clothing
will remain, frequently at very high levels.

3- Pakistan
will benefit substantially from the abolition of its own quotas, with
the benefits resulting from improvements in efficiency of resource
allocation and in world market prices outweighing the loss of quota
rents.

4- Pakistan
may suffer a fall in output and exports of clothing, a result of
stronger competition from countries currently more restricted in this
sector.

5- Output of
the apparel sector could decline by over 10 percent and exports by 17
percent if the productivity is not improved.

6- The
adverse impacts of increased competition may be softened by the
diversity of the industry, with many of the products in which Pakistan
specializes, such as men's knit shirts, being much less important to
competing countries.

7- The
removal of the quotas on China in the EU and the US and expansion of
the Chinese textile and clothing sector is likely to lead to increased
demand for intermediate inputs such as yarn and textiles from
Pakistan.

8- Overall,
the MFA abolition would result in a decline perhaps half a percent of
real income, if no actions are taken to improve productivity.

9- Raising
productivity — either by improving the efficiency of the production
process or the range and the quality of the products produced — is a
key to reaping the benefits from the abolition of the MFA.

10- The
increase in textiles and clothing sector productivity in Pakistan by
around 60 percent — to reach China's prevailing productivity levels
— would result in the welfare gain of over US$ 1 billion per year.

EXPORT SUPPORTING MEASURES

In order to ensure enhanced market access, Pakistan
is focusing on joining various regional and bilateral trade blocs.
After signing a Preferential Trade Agreement with ECO countries in
July 2003, and with China in November 2003, Pakistan is now focusing
on increasing exports to Japan. The plan is to start collaboration
with Japanese trading houses on cost sharing basis for market
research, product identification and subsequent joint marketing in
Japan.

The government plans to establish textile and
garment cities to help boost export earnings from textile sector. The
textile city will be an exclusive production area with necessary
infrastructure. This city will specialize in large-scale production of
value-added textile products. For this purpose, land has already been
identified for garment cities in Lahore and Faisalabad; whereas
Pakistan Textile City Limited has been set up by government in
Karachi, which has been listed with the Securities and Exchange
Commission of Pakistan.

The ginned cotton was exempted from sale tax in the
trade policy for FY05. In addition, with a view to support the towel
manufacturers, import of waste material of textile has also been
allowed.

Some industries are relocating from developed
countries to countries where production costs are lower. The Export
Promotion Bureau (EPB) has launched a scheme to assist Pakistani
companies in this industrial relocation by sharing 50 percent of the
transfer costs.

In order to improve the financing facility
available to the manufacturing sector, the SBP revised the scheme for
financing Locally Manufactured Machinery in July 2004. Under the new
scheme, manufacturers and purchasers of locally manufactured machinery
would be provided credit on concessional terms with mark up rates of 5
to 7.5 percent repayable over a period of 2 to 71/2 years.

For the diversification of export products and
markets the government had earlier allowed 25 percent freight subsidy
on products whose exports were not more than US$ 5 million and for all
products exported to countries where country's average annual export
in the preceding three years were not more than US$ 10 million. This
scheme would continue in FY05.

In order to increase country's exports, the
government with the help of Export Promotion Bureau has launched
various schemes. In addition, various initiatives have been undertaken
to improve quality and volume of developments exports including
fisheries, horticulture, gems and jewellery, footwear, sports,
surgical instruments and carpets.

Important import liberalization measures include:

1)
Removal of the necessary condition of obtaining NOCs from ministry of
commerce has been removed for the import of all permissible items. 2)
Relocation of industrial projects from abroad has been allowed in all
manufacturing and industrial projects in order to reduce the cost of
doing business in Pakistan. 3)
Import of plant, machinery and equipment that is required in national
interest has been allowed in second hand condition for enabling
transfer of technology at lower cost.

EPB STRATEGY

To boost up exports, the EBP has prepared a
comprehensive strategy. Some of these need specific mention. Enhance
world market shares of the Core Product Categories by Increased
penetration of our best performing Categories in the top 10 respective
countries and selectively increase the top penetration of the Core
Product Categories in the next top 10 countries.

CORE CATEGORIES

OTHER CORE CATEGORIES

Textile Garments

Rice

Raw Cotton Yarn (All Types)

Leather / Products

Fabrics

Sports Goods

Garments

Carpets and Wool

Made Ups (Excluding Towel)

Surgical Instruments

Towels

Petroleum Products

Art Silk and Synthetic Textiles

Pursue enhancement of manufacturing and marketing
capabilities and efficiencies with a view to achieve value-addition
and increased competitive strength for our Core Product Categories.

Pursue with national alignment and focused resource
application, selected Developmental export opportunities where
Pakistan currently enjoys, or can achieve, a strong competitive edge.
The identified Categories are:

Bilateral Trade enhancement would be achieved with
countries where Pakistan traditionally/potentially enjoys close
relationships. Enhance market access based on proactive and innovative
management of current or emerging world economic/trading blocs and
bilateral trading arrangements.

After understanding the potential, the threats and
having developed a pragmatic policy let all the stakeholders play
their role. However, the government, which is also the largest
stakeholder has to follow a proactive approach. The policy planners
must remove the irritants as they ultimately lead to serious problems.